The Performance of
Traditional Macroeconomic Models of Businesses' Investment
Spending

The rate of capital formation by businesses has long
been among the most closely watched elements of the
national accounts. During the last decade, this component
of investment attracted considerable interest as capital
spending helped support our uncommonly high rate of
economic growth. Not only did this spending lift the
growth of aggregate demand, it also increased our capacity
for supplying goods and services, which in turn could
allow output to continue growing rapidly in the future.

This article analyzes the performance of conventional
models of investment spending by comparing their abilities
to describe this spending from 1960 to 1990 as well
as their abilities to forecast spending during the 1990s.
The authors find that recent shifts in the composition
of the stock of capital goods and in the relative prices
of capital goods have undermined the performance of
these models of aggregate spending. In many ways, aggregate
capital spending seems to depend more heavily than it
has in the past on industries unique circumstances
and changing technologies. The authors suggest that
errors of the models, the changing composition of capital,
and new methods of measuring the stocks of capital warrant
considering more disaggregated descriptions of investment
spending.